Travel expenses can add up and become expensive when you’re away from home on business.
The good news is that you can deduct most of your business travel expenses if you follow the rules. You might even be able to get in a little vacation time along with your tax deduction when you’re familiar with the Internal Revenue Service’s (IRS) regulations.
The business trip expense rules set by the IRS for deductibility require that expenses meet the following four conditions:
1. The Trip Must Be Away From Your Tax Home
To qualify as a business travel expense deduction, you must travel away from your tax home. Your tax home is defined as where your business is located.
Your business destination must be far enough away from your tax home that you couldn’t be reasonably expected to make the round-trip without stopping overnight for sleep or rest.
To qualify as a business trip, you must leave your tax home for more than a normal workday and with the intent to do business in another location. Travel days on business trips are considered workdays and count as days spent away from home.
2. The Trip Must Be Mostly for Business
Your trip must be “mostly” for business. This means you must spend most of your time doing business, not sightseeing or visiting old friends.
Let’s say you were gone on a business trip for a week, 7 days. You meet with your clients for 5 days and spend the last 2 days on the beach. This trip would qualify as business because you spent most of the time conducting business.
On the other hand, if you work with your clients for 3 days and spend 4 days on the beach, the IRS would call that trip a vacation, and your expenses wouldn’t be deductible.
3. Expenses Must Be Ordinary and Necessary
The IRS uses the term “ordinary and necessary” to classify business expenses. To be deductible, the expense must meet both terms.
An ordinary expense is an expense that’s common and accepted within the practices of your trade or business. The expense should be related to increasing the profit or improving the performance of the business.
The IRS won’t allow you to deduct travel expenses if they are lavish or extravagant. For example, you can’t write off the cost of renting a Lamborghini on a business trip when a Toyota Camry will work just as well.
4. Must Plan Trip in Advance
Your trip must be planned in advance. You’ll need to state where you’ll be each day, the person or people you’ll be meeting with and the number of days you’ll be gone.
One way to prove that a trip is ordinary and reasonable is to schedule in advance. If you’re going to a conference, for example, buy your airplane tickets, conference tickets and make reservations at the hotel.
You should document your plans in writing and email a copy to someone to get a timestamp. These actions will validate the professional purpose of your trip.
List of Usual Business Travel Expenses
These are a few of the most common qualifying travel expenses as deductions:
- Airplane, bus and rail fares
- Baggage fees
- Hotel or home rental expenses
- 50% of meals
- Car expenses if driving
- Rental car costs
- Laundry and cleaning expenses
- Local transportation costs, such as taxi fares to and from the airport
You can deduct 100% of the cost to get to your destination. That could be tickets for an airplane train or bus. If you decided to rent a car and drive to your destination, that would be deductible, too.
However, you can’t deduct the price of an airplane ticket if you use your frequent flyer miles to pay for it.
Travel Tax Deductions Outside the U.S.
The rules for tax deductible overseas travel expenses aren’t as strict when you travel outside the U.S. The IRS allows you to take deductions for a trip if you spend at least 25% of your time conducting business outside the U.S. In this case, the IRS will let you deduct all of your business-related travel expenses.
If you spend less than 25% of your time on business, you can still deduct your travel expenses, but the deduction must be in proportion to the time you spend doing business during the trip.
The cost of your business accommodation expenses at hotels are 100% deductible when you’re away from home. It also is possible to deduct your lodging on days when you’re not doing business. It depends on how you schedule your workdays.
Let’s say you fly to Dallas on Thursday and meet with your clients on Friday. You decide to stay over the weekend and meet again with your clients on Monday. After completing your business, you fly home on Tuesday. You’re away from home for a total of 6 days.
Your hotel rooms for 5 nights are completely deductible because your trip consisted of four business days — Thursday, Friday, Monday and Tuesday — and 2 personal days, Saturday and Sunday. Thursday and Tuesday are counted as business days because you were traveling. The purpose of your trip is primarily related to business.
Flying back home on Friday just to return on Monday for more business meetings wouldn’t make any sense.
Conventions in the U.S.
Travel expenses to attend a convention in the U.S. are deductible if you can show that the workshops, seminars and conferences benefit your business.
Unfortunately, the expenses for a spouse or an associate attending the convention with you are not deductible unless it can be shown that they work for the business. Taking notes or socializing with other attendees isn’t enough to qualify.
Conventions on Cruise Ships
- Expenses to attend conventions on cruise ships must meet the following requirements:
- Convention must be related to the activities of your business.
- Cruise ship must be registered in the U.S..
- All of the cruise ship’s ports of call must be in the U.S. or its possessions.
- You must attach a statement signed by yourself that includes the number of days you spent on the trip, the number of hours you spent each day attending scheduled business activities and a program from the convention sponsor that described these meetings and scheduled activities.
- You must attach a written statement signed by an official of the convention’s sponsor to your income tax return that includes a schedule of each day’s business activities for the convention and a certification of the number of hours that you attended each of these scheduled business activities.
If you can provide all this documentation and satisfy the other requirements, the maximum deduction that you can take is $2,000 per year to attend a convention on a cruise ship.
Meals and Entertainment During Stay
The IRS assumes that you have to eat your meals somewhere, even if you’re on a business trip. So they only allow you to deduct 50% of the cost.
If you’re having a meal with a client, you should record the following to support the deduction:
- Place and name of the restaurant
- Name of client
- Purpose of meeting
The Tax Cuts and Jobs Act of 2017 eliminated the entertainment deduction for clients. You can no longer deduct such items as concert tickets or greens fees to play golf.
Meals and Entertainment While Traveling
Even though you’re probably eating alone, you can deduct your meals while you’re on the road traveling. However, the deduction is still limited to 50% of the cost.
Here again, the cost of your meals must be ordinary and necessary. The IRS won’t allow you to deduct extravagant and expensive meals.
Bringing Friends and Family
It’s okay to bring friends or family with you on a business trip, but you can’t deduct any additional expenses for bringing them. For example, if you had to rent a larger van to bring the kids, you couldn’t deduct the additional expense above what it would have cost you to rent a vehicle just for yourself.
The same strategy applies to lodging. If you pay for a house rental to accommodate the entire family, you can only deduct the portion that’s equal to the lodging cost that you would pay just for yourself.
Let’s say you’re in an area where a hotel room for a single person costs $100, and the accommodations for your family costs $225. Your deduction would be limited to the price for a single person or $100.
Be Sure to Keep Records
Many of the IRS regulations for deducting business travel expenses are in the gray area. However, if you keep in mind that expenses must be ordinary and reasonable and you can support your claim with adequate documentation, you’ll have a better chance of the IRS accepting your deductions.
You don’t want to try and deduct any expenses that will attract the attention of the IRS and invite an audit.
Remember that just because you’re writing off an expense, you’re really only getting the benefit of whatever your marginal tax rate is. For example, if you are deducting a $1,000 airline ticket and your marginal tax rate is 35%, the benefit to you is a $350 reduction in your taxes, not $1,000. So, you have to decide if the real benefit in tax deductions for travel expenses is worth taking the risk.